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Chapter 5
Advancing an Innovative Economy
Overview
Technological change continues to transform the global economy. As advances in broadband communications diffuse information more quickly, basic technologies commoditize and the premium on innovation increases. Global labour markets are emerging, changing the returns to skilled work and the location of skilled workers.
Innovation contributes to economic growth by increasing efficiency and creating new products. Innovative firms create jobs and ultimately provide higher wages. Countries at the forefront of innovation will be best placed to develop the high value-added sectors that can provide new sources of growth.
No single element on its own creates an innovative economy. The innovation system is made up of complex and complementary activities of public institutions, workers and firms.
As a result, improving Canada’s innovation performance demands a multi-pronged strategy. Most fundamentally, improvement in Canada’s innovation performance will be underpinned by a strong environment for investment, a competitive tax system, promotion of domestic competition and openness to foreign direct investment. These are discussed in Chapters 6 and 7.
These fundamentals need to be complemented with a strong foundation in primary research resulting in new discoveries, and training for highly sophisticated researchers essential for the knowledge and resource economies. In order to attract, cultivate and retain the best and the brightest, Canada must be at the heart of international research networks. The Government has a critical role to play in stimulating improved private sector commercialization and R&D performance, tackling the market failures that slow the diffusion of new ideas, and facilitating partnerships between researchers and industry to turn invention into innovation and concept into product.
Relationship to Prosperity
An innovative economy rests on the foundations of knowledge created in its universities, the level of excellence it attains in discovery, and its success in training people with advanced skills. Innovation is fuelled by new technologies adopted by firms through their investments in machinery and equipment and the ideas they develop through firm-based proprietary R&D and technology licensed from abroad. By training more highly qualified people and raising investments in new technologies and R&D, an economy raises its productivity, rate of economic growth and standard of living.
University Research Creates New Ideas and Highly Skilled Innovators
By far the most important contribution made by research-intensive universities is in training highly skilled graduates that businesses increasingly need to develop and adopt new technologies. Through their university experience, students gain exposure to leading-edge research concepts and techniques. Recent graduates transfer the knowledge generated from university research to the companies that hire them. Getting the brightest students and university researchers to interact with knowledge-intensive firms exposes students to private sector challenges and creates linkages for future collaboration.
University research, of course, also creates a better understanding of the world around us, strengthens public policies, enriches our culture, leads to new health care practices and medicines, and adds to the general stock of ideas that companies can apply to create value.
As the discoveries that come from primary research are widely available, the benefits are not confined to a single user but "spill over" to companies across the economy. The OECD estimates that the economy-wide spillovers from public research have a 40 per cent greater impact than the more limited (but still important) spillovers from private sector research.[1] Canada also greatly benefits from public research performed abroad. The better networked we are to international research, the more we will benefit.
Investment in Machinery and Equipment Transfers New Technologies
Investment in machinery and equipment gives firms access to the latest ideas embedded in leading-edge technology. New technologies enable workers to produce more and higher-quality goods and services through more efficient business processes. In turn, this can reduce production and operating costs for companies and contribute to faster growth.
There is growing evidence that investment in information and communications technologies (ICT) played a crucial role in accelerating productivity growth in the latter half of the 1990s. This ICT-related productivity growth acceleration occurred only in a few countries, including Canada, Australia and the U.S. The OECD estimates that two-thirds of Canada’s productivity gains over the period 1990–2000 were attributable to industries that use ICT intensively, and to ICT producers. The digitization of information, common computing standards and the Internet are also enabling the creation of international supply and production chains, in which investment and work are moving to the most productive locations. This is expected to continue.
Private Sector R&D Generates Wealth
Research activities in the public and private sectors are complements. Businesses cannot make full use of the knowledge generated by universities and other public labs unless they have their own research capacity. A company’s capacity to undertake R&D also increases its ability to apply developments from private sector R&D undertaken by others to improve its own products and processes and to understand and adopt new machinery and equipment.
Private sector R&D is critical because it is more directly correlated to economic growth than public research. The OECD estimates that a
1-percentage-point increase in the research undertaken by the private sector as a proportion of GDP could increase the average level of GDP per capita by as much as 12 per cent in the long run.[2]
Recent Performance and Broad Policy Directions
Canada’s leadership in public research creates a strong foundation for building a more innovative economy. Improving the linkages between Canadian universities and firms will enable the private sector to take better advantage of university-based discoveries. Canadian firms are adopting leading-edge technology through investments in machinery and equipment and R&D. While Canadian firms are already reasonably innovative by international standards, they have the opportunity to increase value they realize from their innovations in the marketplace.
1. Leadership in University-Based Research
To fuel their innovation, companies often rely on new ideas from university research and graduates educated at the frontiers of knowledge. Canada is creating a world-class university research environment through investments in people, research and world-leading equipment and facilities.
The Government has focused its investments at the earliest stages of the innovation process, where the private sector tends to underinvest. In no small part due to these investments, Canada is now far and away the G7 leader in terms of university R&D performance as a share of GDP, and second in the OECD behind Sweden. Since 1997, the Government has invested a cumulative $12 billion in new funding to strengthen support for researchers, facilities and equipment and the research environment at universities. Increased contributions from the universities themselves, provincial governments and the private sector complemented this strengthening of the R&D capacity of our universities.
These investments are having an impact: academic publications by Canadian university researchers increased by 30 per cent between 1997 and 2004, double the increase experienced over the previous seven-year period. As well, the Government’s investments have helped universities to retain and attract leading researchers, reversing the "brain drain" of scientists to other countries and making Canada a preferred location for in-demand researchers. There are 3,200 more researchers at Canadian universities now than there were five years ago.
Universities have also used the new resources to develop high-quality graduate programs with growing international reputations, which are key to training new researchers and attracting high-calibre students from elsewhere.
| Canadian Universities Are Now Attracting Leading Researchers | |
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Michael Byers Dr. Byers was previously Professor of Law and Director of Canadian Studies at Duke University and is well-known for his work in international law and politics. Jillian Buriak Winner of the 2003 American Chemical Society Award for Pure Chemistry, Dr. Buriak is a specialist in silicon surface chemistry and comes to Canada from Purdue University. Bill Thomlinson Dr. Thomlinson held a number of research and senior management positions with Brookhaven National Laboratory in the U.S. and was Head of the Medical Research Group at the European Synchrotron Radiation Facility in Grenoble, France, before moving to Saskatchewan to lead Canada’s synchrotron. |
Jacques Corbeil Université Laval Dr. Corbeil comes to Laval from the University of California, San Diego, where he was Director of the Genomics Core Laboratory and focused on infectious diseases and certain cancers. Jeremy M. Grimshaw Dr. Grimshaw, a knowledge translation expert, previously held a number of positions in the United Kingdom, most recently in Health Services Research at the University of Aberdeen. Hélène Paradis A specialist in childhood cancers, Dr. Paradis held a postdoctoral fellowship at Harvard’s Dana-Farber Cancer Institute, and worked on the faculty of the University of Cincinnati before joining Memorial University.
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Broad Policy Directions Leadership in University-Based Research
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2. Strengthening International Research Networks
The creation of research-intensive universities that meet international standards of excellence provides a foundation for collaborating with the best institutions abroad and attracting leading students and researchers from other countries.
Canada benefits from accessing the discoveries that result from other countries’ investments in primary research. Canada’s total national investment in university R&D in 2003 was about US$6.7 billion; Germany invested US$9.6 billion, Japan US$15.0 billion and the United States US$47.7 billion. Strengthening the networks between our leading universities and institutions in these countries opens up channels to transfer knowledge from a much larger research base.
While we have about 35,000 university researchers in Canada, Germany has more than 70,000, Japan more than 170,000 and the U.S. over 185,000. Emerging economies such as India and China are also significantly expanding their training of highly skilled workers—there are now over 1 million R&D personnel in China alone. The best and brightest from around the world are attracted to institutions with world-leading facilities, and which are performing research that meets the highest standards of international excellence.
Our international leadership also means managing the global commons essential to our shared prosperity and promoting research in areas which address the priorities of least developed countries such as health and environmental technologies.
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Broad Policy Directions Strengthening International Research Networks
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3. Encouraging Private Sector R&D and Technology Adoption
Canadian firms appear to underinvest in technology adoption and R&D. Business investment in machinery and equipment is one measure of the rate of technology adoption in an economy. By this measure, Canadian firms invest less than their peers in other major countries, a pattern that has persisted for at least three decades. However, potentially as a response to the improved investment environment described in Chapter 7, it is encouraging that total investment in machinery and equipment has increased in Canada as a share of our economy over the past 10 years. Much of the machinery and equipment that is purchased by Canadian firms is sourced from outside the country, giving our companies access to foreign R&D.
Higher R&D Investments Create Opportunity
for More Rapid Growth
Overall, Canadian private sector R&D investments are lower as a share of our economy than in most other advanced countries. Canada ranks sixth in the G7 in terms of private sector R&D investments as a share of GDP. Canada’s business expenditures on R&D to GDP ratio was less than 1.0 per cent in 2004, compared to 1.8 per cent for the U.S.
Most of the Canada-U.S. gap results from differences in the structure of Canada’s economy. About two-thirds of the gap results from lower R&D investment levels in the automotive and service sectors. Canada’s automotive sector devotes less than 5 per cent of its value added to R&D, compared to over 15 per cent in the U.S. However, Canadian-based assemblers benefit from their parent companies’ R&D investments as new machinery and manufacturing processes are transferred to facilities in Canada. Although the R&D intensity of the Canadian service sector remains lower than in the U.S., Canadian service sector firms increased their investment in R&D threefold from 1991 to 2002. The improved policy environment since 1994 likely encouraged the closing of this gap; but more remains to be done.
Overall, Canada’s high-technology sectors have a strong R&D record. Among OECD economies, the most R&D-intensive sectors are office and computing products, communication equipment, pharmaceuticals, other transportation equipment (primarily aircraft) and motor vehicles. Canadian companies in the first three of these sectors invest, as a percentage of value added, as much or more than their competitors. However, as these sectors are a smaller part of Canada’s economy compared to the U.S., this limits their impact on national R&D data.
Higher rates of growth in the R&D-intensive sectors, and continued increases in R&D by the service sector, will raise Canada’s overall R&D intensity over time. Higher investments in research and technology development and adoption support economic growth and can also contribute to a more sustainable economy. The Government’s increased investments in environmental technologies are helping Canada better achieve both objectives.
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Building an Innovative Environmental Technology Sector
Investments in environmental technology have the dual advantage of promoting economic growth and improving the environment through stronger environmental performance and reductions in greenhouse gases (GHGs) by, for example, promoting increased energy efficiency and alternative energy sources. The Government of Canada has made significant investments to promote the research, development and adoption by the private sector of innovative technology solutions to our environmental challenges. These investments include:
In addition, the Government has indicated that Canada’s largest industrial emitters of GHGs will be able to make investments in approved technology investment funds to meet part of their emission reduction obligations under Canada’s Climate Change Plan. These funds will focus research, development and deployment activities in these sectors to facilitate the longer-term transformation needed to meet Canada’s ultimate GHG reduction goals. |
Accessing R&D From Other Countries Raises Canadian Firms’ Technology Intensity
In addition to directly performing research, Canadian firms gain access to foreign R&D by purchasing licences and paying royalties to access the technologies resulting from the R&D investments of foreign firms. In a small, open economy, these forms of technology transfer, along with foreign direct investment, are essential mechanisms for raising productivity levels.
Statistics Canada has quantified the technology intensity of countries by combining domestic private sector direct investment in R&D with an estimate of the R&D that is acquired through licences and royalty payments for foreign technology.
Compared to the United States, if only domestic private sector R&D is measured, the technology gap is 50 per cent in favour of U.S. businesses. The inclusion of R&D embedded in foreign-source patents and technologies accessed by Canadian firms increases the GDP share of Canada’s private sector R&D by as much as 80 per cent. Taking this broader view of research and technology intensity suggests that while Canadian firms have scope to increase their investments to catch up with the leaders, the gap is much narrower once the benefits of technology adoption are taken into account.[3]
Accessing knowledge developed in other countries raises the technological capabilities of firms and is another reminder of the importance of openness to economic performance. It is also complementary to direct R&D investments because firms that perform R&D and employ workers with advanced scientific and engineering skills are best placed to successfully adopt technology developed elsewhere. But for a leading economy there is no substitute for firms also developing their own innovations—initiating rather than imitating.
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Broad Policy Directions Encouraging Private Sector R&D and Technology Adoption
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4. Accelerating the Commercialization of New Technologies
Improving the diffusion of discoveries from university and public research will raise firms’ innovation performance. Canada’s strong foundation in primary research provides an opportunity for our firms to be the first to develop and market new innovations. As Canadian universities collaborate more with institutions in other countries, they can diffuse this broader pool of knowledge to our firms.
The commercialization output of university research is generally measured by the number of licences granted, the revenues from these and the number of start-up companies created with university-developed technologies. Canadian universities perform about as well as U.S. institutions in creating intellectual property from their research. Canadian and U.S. institutions also create close to the same number of licences per research dollar and have similar proportions of licences that are active and yielding income.
However, recent data indicates that Canadian universities receive less income from their intellectual property than U.S. universities. Lower returns to technology licences may be the result of Canadian companies commercializing these discoveries in a smaller national market, rather than introducing their improved products and services to broader markets outside of Canada. Once again, developing a global orientation may be important. Canadian universities also rely relatively more on start-up companies to bring their discoveries to the market, whereas institutions in the U.S. take greater advantage of existing firms. As Canada’s technology-intensive sectors grow, this trend may change as existing companies provide a larger receptor capacity for university-based discoveries.
Universities have begun to allocate more resources to commercialization activities and incorporate technology transfer goals into their strategic plans. In Budget 2004, the Government announced two pilot initiatives aimed at improving the commercialization of discoveries emerging from universities and federal laboratories, and the three granting councils are tripling their support for the commercialization of their sponsored research by 2006–07.
Strengthening linkages between university researchers and firms, so that knowledge flows more smoothly from the research environment to the private sector, will enable Canada to benefit more from its leadership in primary research. Improving the flow of people between universities and companies will further enhance private sector capture of intangible and applied knowledge by providing companies with individuals who have the research know-how, experience and networks needed to take better advantage of primary research outcomes.
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Linking Government Labs With Universities and the Private Sector
In July 2005 the Government announced that Natural Resource Canada’s CANMET Materials Technology Laboratory (CANMET-MTL) is moving to new state-of-the-art facilities in Hamilton’s McMaster Innovation Park. The relocation will position CANMET-MTL within an existing cluster of industries and research organizations, and will contribute to the competitiveness of the value-added metal products sector in Canada. CANMET-MTL conducts research to assist Canadian industry to develop innovative materials and technology solutions. The laboratory’s research is focused on the transportation, construction and energy industries. |
The transfer of knowledge between other public research institutions and the private sector can also be improved. Co-locating government research laboratories with universities and closer to concentrations of related industries can improve knowledge transfer and collaboration.
Government laboratories raise the technological capabilities of several key sectors, including agriculture and agri-food. The Government’s efforts in improving market access and helping sectors adjust to unexpected economic shocks also contribute to better commercialization performance.
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Building an Innovative Agriculture and Agri-Food Sector
Over the last five years, labour productivity growth in agriculture averaged 6 per cent annually. Exports in the agri-food sector have grown at an average annual rate of 5 per cent, rising to roughly $30 billion in 2004. However, in recent years, farmers have been beset by declining output prices, rising input costs and successive agricultural crises, including drought, bovine spongiform encephalopathy (BSE), avian influenza and flooding. Together, these factors have resulted in record-low farm income in 2003, although incomes rebounded in 2004. Governments have responded with record-level support to farmers. This is an interim solution. Looking forward, the Government of Canada is committed to ensuring the long-term sustainability of the agriculture and agri-food sector. In order to achieve this objective, the sector will have to undergo a significant transformation. To assist in this transformation, the Government will focus on the following priorities:
These efforts are aimed at strengthening the competitive underpinnings of the agricultural sector and sustaining rural communities. |
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Broad Policy Directions Accelerating the Commercialization of New Technologies
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1 Dominique Guellec and Bruno van Pottelsberghe de la Potterie, "R&D and Productivity Growth: Panel Data Analysis of 16 OECD Countries," OECD Economic Studies, No. 33 (2001). [Return]
2 OECD, The Sources of Economic Growth in OECD Countries (2003). [Return]
3 John Baldwin, Desmond Beckstead and Guy Gellatly, Statistics Canada, "Canada’s Expenditures on Knowledge Capital" (2004). [Return]
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